In the capital asset pricing model, diversifiable risks do not affect the cost of capital.

Question

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According to the capital asset pricing model (CAPM), diversifiable risks (also known as unsystematic risks or company-specific risks) do not affect the cost of capital because they can be diversified away by investing in a portfolio of assets. The cost of capital is determined only by the systematic risk of an investment, which is measured by beta.

In the Capital Asset Pricing Model, Diversifiable Risks Do Not